1. Fair value Accounting and Procyclicality – Christian Laux Discussant -Patricia Jackson

2. Key issues • Did FVA exacerbate the crisis? • downward spirals of asset write downs • contagion fire-sale of assets • did it create undue volatility? • Did banks take large fair value profits in the boom? • Was behaviour driven by the fair value accounting? • What should the regulatory treatment be?

3. Did banks take large fair-value gains? • By and large – the assets that were marked down had not been marked up –but profits were made on the securitisations Securitised assets Water-fall $110 of securities $100 of loans £10 retained so £10 profit

4. Were fair values overly conservative in the crisis? • IASB guidance that fire-sale values did not need to be used • although FSA has asked for lower of market and prudent value • But in hold-for-sale books or trading books could not recognise that over long haul, if held to maturity, losses might not be so great • 2008 change to IAS39, allowing exposures to be reclassified did reduce pressure • ‘held for sale’ assets could be reclassified as ‘held to maturity’ in rare circumstances

5. Would lack of disclosure of losses have been helpful? • Greater not less disclosure was important • Market knew who was holding what • Could the disclosure have finessed the losses – had the rules been different • Hold to maturity value • Not today’s value • Possibly, but to a degree losses were real • Hold to maturity value would be difficult to assess

6. Is there a better approach going forward? Accounting treatment Level 1 –quoted active market Level 2- prices derived from observable Level 3 –valued using models not all inputs observable Should there be greater scope to reclassify illiquid exposures to the banking book? For regulatory capital – could there be a different test? Would need hedge accountancy rules Plus derivatives that can be offset/hedged

7. Would this deal with behavioural issues and fire sale?

8. Contacts • Patricia Jackson • Email pjackson@uk.ey.com • Tel +44 207 951 7564